Why issuers like most of an advisory panel's muni recommendations

WASHINGTON – Issuers are generally pleased with most of the recommendations slated for discussion at this week’s Securities and Exchange Commission Investor Advisory Committee meeting in Atlanta, including one that urges the SEC more narrowly tailor the scope of its proposed amendments to Rule 15c2-12 on disclosure.

The Government Finance Officers Association voiced its support for that idea in a comment letter dated June 12. The IAC's recommendations mirror some of the ones that were included in the SEC's 2012 Report on the Municipal Securities Market, and are on the agenda for the June 14 meeting of the committee in Atlanta.

The GFOA noted approvingly that the IAC suggested taking into account stakeholder commentary on the SEC’s proposal to add two material events to the list of triggers requiring an issuer or borrower to file an event notice on EMMA. Issuers complained loudly last year that the proposed 15c2-12 amendments were too far reaching in scope.

“We agree that the SEC should be aware of the considerable problems associated with adopting multiple changes to Rule 15c2-12 as proposed,” wrote Emily Brock, director of the GFOA’s Federal Liaison Center. “The proposed changes would be burdensome to issuers, add complication for investors and the general public, and ultimately increase costs to taxpayers and investors.”

Emily Brock, director of GFOA's Federal Liaison Center

The SEC’s proposal would require an issuer or borrower to file an event notice if they incur a financial obligation that is material or that has an agreement to [material] covenants, events of default, remedies, priority rights or similar terms "any of which affect securities holders." The proposal also would require an event notice to be filed for certain actions or events related to the financial obligation that "reflect financial difficulties" such as a default, event of acceleration, termination event, or modification of terms.

The IAC recommendations, dated June 5, suggested among other things that the SEC define “financial obligation” to encompass indebtedness and similar obligations but not be so broad as to include leases. Brock warned that the broadness and lack of clarity that issuers see in the existing proposal would be difficult for state and local governments to live with.

“The required determination of ‘materiality’ coupled with the vast definition proposed for ‘financial obligation,’ uncertainty about the defined scope of ‘leases,’ ‘guarantees’ and ‘derivative instruments’ and [the] lack of definition with regard to ‘financial difficulties’ would create significant administrative and costly burdens to state and local governments,” Brock wrote. “We have requested clarification and are grateful to see the recommendations echo our concerns.”

GFOA’s letter also addressed the committee’s recommendation to update the SEC’s 1994 interpretive guidance addressing primary and secondary disclosure issues in the market. The IAC recommended updating that guidance, as SEC staff had previously called for in the 2012 report. Brock told the committee that the GFOA maintains best practice guidance for issuers and regularly offers guidance and training, and would like to assist in updating the 1994 release.

The GFOA letter also touches on a recommendation that the Municipal Securities Rulemaking Board's EMMA system could be enhanced by highlighting for investors when an issuer is out of compliance with its continuing disclosure requirements. The committee suggested placing a “flag” on an issuer homepage notifying investors that an issuer is out of compliance with its continuing disclosure requirements. Issuers support enhancing EMMA, Brock wrote, but believe that it will require significant work before such a "flag" system could proceed.

"We recognize that financial information is crucial to the decision making of most investors, and we believe that if the SEC were to move forward with this recommendation, it would also need to conduct considerable dialogue with issuers and other market participants to determine the parameters in which such a system should be implemented and monitored," wrote Brock.

The IAC was created by the Dodd-Frank Act and is charged with advising the commission on protecting investor issues and promoting confidence in the securities markets. The commission is not obligated to adopt the committee's recommendations.

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